Question

When a price floor is in effect: consumer and producer surplus is transferred to the government. some producer surplus is transferred to the consumers. dead-weight loss is transferred to producers and consumers. some consumer surplus is transferred to the producers.

Answer 1

Answer: dead-weight loss is transferred to producers and consumers.

Explanation: Price floor is a regulatory tool used by government to set a fixed price for goods and services. For a price floor to be effective, the minimum price must be higher than the equilibrum price of the product or service.

An example of this is the set workers minimum wage.

There are different effect of a price floor and it includes:

1. It can cause a deadweight welfare loss which is a loss in economic efficiency.

2. Reduction in the demand for goods and services.

3. Excessive supply by producers

4. Leads to market failure.